Days Sales of Inventory - DSI
Categories: Accounting, Company Management
You own a business. You want to get a sense for the number of times your company turns over its inventory on an annual basis. It’s important to keep track of your inventory ratio for purposes of budgeting, understanding your storage needs, and to track just how many products you are buying from your wholesaler. Like...if you have tons of capital tied up in inventory that is just sitting there on the shelves, it's a problem. Or at least inefficient.
To get this DSOI number, take the number of days in the year or the numbers in the k business calendar (365 or 360). Then divide that number by your firm’s inventory turnover ratio (which is the Cost of Goods Sold in a year divided by the average inventory level during that same year).
Example:
Your Cost of Goods Sold was $3 million for the year. The average cost of inventory was $500,000. This means that your inventory turnover ratio was 6 ($3 million / $500,000).
Given that the company had an inventory ratio of 6, we can determine the average numbers of days that it took to sell the average amount of inventory.
So we divide 360 days by the inventory ratio of 6, and we find that the company had on average 60 days of inventory available.
Related or Semi-related Video
Finance: What is Days Sales Outstanding?30 Views
finance a la shmoop- what is days sales outstanding? okay so this isn't a
congratulatory missive, like hey you have a lot of sales today [men in suits smile]
outstanding! no it's nothing like. that day sales outstanding or dsos is a
balance sheet computation that puts in perspective how well or rather how
quickly you are collecting the bills you are owed for stuff you have sold. like
let's say your company pulp friction is selling paper pulp to the newspaper [paper truck]
industry. gradually week after week month after month quarter after quarter your
DSOs are creeping upward from the thirty eight days to now fifty three days in
the course of a few years. well what's going on here
well if the newspaper industry were financially healthy it would be [doctor examines office building]
reasonable that they would want to pay their bills on time, but clearly there is
a trend here. another year goes by and DSOs are now at sixty four days. this is
a problem people the industry is paying for the pulpit consumes to print on
paper at a slower rate than they did before. well why well the newspaper [chart shown]
industry is slowly going broke and they're trying to conserve as much cash
as they can, by leaning on their vendors to essentially finance them so that they
you know die more slowly. key takeaway DSOs are a relative number that is in a [equation]
vacuum, if you just look at one number as a representation of DSOs it doesn't
really mean anything. dsos have to be taken in context of the
history of the company itself and in context of whatever the industry average
is. like maybe the average DSO of a pulp maker is highly seasonal, and each year at [man smiles with sunshine and rain]
ebbs and flows with the weather. or maybe your particular pulp company was way
better than the norms and it's just normalizing as DSOs creep back up to the
industry standard of 64 days. context. alright so the calculation. how do you
calculate DSO? well it's this just accounts receivable divided by sales [equation]
made on credit. and if you're inside of a large corporation you can assume that
all sales are made on credit. it's not like a McDonald's Store where a USA
Today or The Wall Street Journal walks in hands [ drive through window]
warehouser the pulp company 14 million dollars in cash for 7,000 tons of pulp.
think about the equation. its volatile. and it can turn into a quote good
unquote number quickly by having your pulp [man eats dinner]
selling business turned sour. like nobody buys from you for a long time and
everyone pays their bill .well all of a sudden you have a DSO number of like [dump truck knocks man over]
five, because nobody owes you money in the form of your account receivable. not
a good situation either again DSOs need context. a huge DSO number can be just
fine as well all of the sudden China Russia and all [world map]
of Latin America buy your pulp. you suddenly have a billion dollars in
accounts receivable and it'll take you months and months and months to fulfill
those orders. so your dsos then balloon up and look
bad, well most companies would kill to have this quote bad unquote DSO number. [man is mugged]
so that's it DSOs are just a relative index of how well you are collecting
your bills. receivables over sales that's it. outstanding work [equations]